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Financial Accounting II > Chapter 9: Liability > Flashcards

Chapter 9: Liability Flashcards

1
Q

Acquisition of assets is financed from 2 sources

A
  1. Debt –> Funds from creditors
  2. Equity –> Funds from owners
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2
Q

A companies capital structure

A
  1. Debt is riskier than equity
  2. Debt payments are legal obligations
  3. Creditors can force bankruptcy
  4. Creditors can require sale of assets
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3
Q

Types of liabilities

A
  • Current Liabilities –> Maturity in 1 year or less
  • Non-Current Liabilities –> Maturity in more than 1 year
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4
Q

Trade payables / Accounts Payable

A

Obligations to pay for goods and services used in the basic operating activities of the business

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5
Q

Accrued Liabilities / Accrued Expenses

A

Obligations related to expenses that have been incurred but have not been paid at the end of the accounting period

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6
Q

Notes Payable

A

Obligations are due supported by a formal written contract

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7
Q

Deferred Revenues / Unearned Revenues

A

Obligations arising when cash is received prior to the related revenue being earned

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8
Q

Accrued Liabilities

A

Expenses that have been incurred before the end of an accounting period but have not yet been paid.

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9
Q

Accrued Liabilities Include

A
  • Income taxes payable
  • Taxes other than income taxes
  • Payroll liabilities and employee deductions
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10
Q

Income taxes payable

A

Corporations must pay taxes on income from active business operations, property income, and capital gains arising from the sale of assets

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11
Q

Taxes other than income taxes

A

taxes such as HST/GST and PST are added to the sales price, collected from customers, and then remitted to federal and provincial governments

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12
Q

Payroll liabilities and Employee deductions

A

As personal income tax, EI, AND CPP are withheld from the employee’s gross earnings and the employee receives a pay cheque for the net pay.

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13
Q

Gross pay is deducted with…

A
  1. Canada pension plan
  2. Health taxes and premiums
  3. Federal and provincial income tax
  4. Employment insurance
  5. Voluntary deductions
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14
Q

The time value of money

A

Interest that is associated with the use of money over time

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15
Q

How does a note payable specifies the interest rate?

A
  • To the lender, interest is a revenue
  • To the borrower, interest is an expense

Interest = Principal x Interest Rate x Time

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16
Q

What is the current portion of long-term debt?

A

Any portion of a note payable that is due within one year, or the operating cycle, whichever is longer

17
Q

Deferred revenues

A
  • A company collects cash before the related revenue has been earned.
  • Reported as liability
18
Q

When the amount or timing of a liability is uncertain, it is referred to as…

A

A provision

19
Q

When does a provision get recognized?

A

(1) An entity has a present obligation as a result of a past event
(2) It is probable that cash or other assets will be required to settle the obligation, and
(3) A reliable estimate can be made of the amount of the obligation

Provisions include:
- Estimated liabilities for warranties
- Legal and tax disputes
- Closing of stores or specific operations

20
Q

Matching process for provisions require that…

A

the recognition of the estimated provision for warranty expense in the same period as the sale is recorded

21
Q

What is a contingent liability?

A

Possible liability that is created as a result of a past event, and which or may not become a recorded liability, depending on future events.

22
Q

Examples of a contingent liability

A
  • Lawsuits
  • Environmental problems
  • Tax disputes
23
Q

When the amount of liability can be estimated reliably…

A
  • Provision must be recognized
  • Disclosure of the provision is required
24
Q

When the amount of liability cannot be estimated reliably…

A
  • There is no need to recognize a provision
  • Disclosure is required for the contingency
25
Q

When there is a present obligation or a possible obligation that may, but probably will not, require an outflow of resources…

A
  • There is no need to recognize a provision
  • Disclosure is required for the contingency
26
Q

When there is a present obligation or a possible obligation where the likelihood of an outflow of resources is remote…

A
  • There is no need to recognize a provision
  • Disclosure is not required
27
Q

Under ASPE, what is the meaning of “Probable”?

A
  • Probable has been defined as likely which is interpreted as a greater than 70% chance of occuring
28
Q

Under IFRS, what is the meaning of “Probable”?

A
  • Probable has been defined as more likely than not which would imply more than 50% chance of occurring
29
Q

Reporting a contingency, ASPE vs IFRS.

A
  • Companies under IFRS would record a liability
  • Companies under ASPE would record a contingency
30
Q

What is Working Capital?

A

Current Assets - Current Liabilities

31
Q

Liquidity

A

Ability to pay current obligations

32
Q

Working capital relationship to income-producing activities.

A
  • A/R increase when sales are made on credit
  • A/P Increase when inventory is purchased on credit
33
Q

Quick Ratio

A

Quick assets / Current Liabilities

  • High ratio suggests good liquidity
  • Too high ratio suggests inefficient use of resources
34
Q

Present Value Concepts (4 item of growth)

A
  1. Value of today (present value)
  2. Value in the future (future value)
  3. Interest rate
  4. The time period
35
Q

Two types of cash flows can be involved

A
  • Periodic payments called annuities
  • A single payment
36
Q

Present and future value tables are available for…

A
  • Future value, single amount
  • Present value, single amount
  • Future value, annuity
  • Present value, annuity
37
Q

Present Value of a Single Amount

A

The present value of a single amount is the worth to you today of receiving that amount sometime in the future

Financial Accounting II (6 decks)

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